Central Bank Independence and Financial Regulation: Will More Power Make the ECB Less Lonely?

The assignment of financial regulatory powers to the ECB is seen by many observers with scepticism. Critics suggest that the central bank should have a narrow remit with clear accountability for the inflation outcome, and that wider powers raise issues of democratic legitimacy. This paper takes a different approach: rather than asking whether the dual mandate is legitimate, we ask whether the central bank’s task is politically viable. The ECB’s success as a financial regulator depends on whether it will get the requisite degree of cooperation from political authorities. The vaunted independence of the ECB reflects the presence of multiple principals. These principals can act as veto players, blocking cooperation and turning independence into loneliness. To understand the impact of additional regulatory powers on loneliness, we address two questions. First, why did the ECB seek and obtain the powers of financial regulator, rather than creating a separate supranational body? Second, can the ECB use its power of financial regulation to force national governments into cooperation on bank resolution?